Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Dermot Desmond

Market Musings 7/6/2012

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Markets have been extremely volatile in recent days due to a combination of ratings agency downgrades, dodgy economic signs and a view by some investors (this one included) that the worse things get from a macro perspective, the more likely it will be that Central Banks introduce further quantitative easing.


This brings to mind something that I have been meaning to mention for a while – I often get queries from people about “what my X month price target for XYZ stock is”. The simple truth is that nobody, except perhaps a market maker in the most illiquid of stocks, has a clue about what price a stock will be trading at tomorrow, let alone in a few months. In a world where we cannot rely on meteorologists to call tomorrow’s weather with 100% accuracy, it would be ill-advised to have that degree of confidence in someone who pontificates on the equity markets! For the record, whenever I express a ‘price target’ for a company, this is my estimate of the underlying equity value of the company, as opposed to a target I see it hitting in any specific timeframe. This is especially true in the current environment, where markets oscillate violently between ‘risk-on’ and ‘risk-off’. All I can do is stick to my central thesis for this year, which I wrote back in December, and which I see no reason to change, given how my thesis, shown below, has played out so far:


Looking ahead to [2012], I see no grounds to assume that the macro situation will be materially different to that which we saw in 2011. Sclerotic growth across the leading Western economies, limited credit availability, rising unemployment, political uncertainty and austerity are all likely to be key themes over the coming 12 months. Added to the mix is likely to be a pronounced deterioration in the Chinese economy. I am gravely concerned at the rise in economic nationalism and see further policy incoherence at a European level as countries pull in different directions. However, my sense is that the euro will survive, given that its failure would lead to a deep and prolonged depression on a scale not seen for close to a century. That said, its survival will come at the expense of a weaker euro as monetary policy here is loosened to ensure its survival (given the lack of political consensus on how to fix the issue, I don’t see a solution that doesn’t involve some form of quantitative easing).


For me there are five key tactics to mitigate against this pressure:


  1. Choose firms with strong balance sheets
  2. Choose defensives over cyclicals
  3. Choose firms with significant exposure to markets outside of the Eurozone
  4. Hedge against inflationary pressures / political risk
  5. Choose firms with attractive and well-covered dividends.


Moving on to corporate news, Dragon Oil, which I traded in-and-out of earlier this year, announced a $200m share buyback. Opinions vary on this move. Steve Markus, who I have great respect for, and who is a must-follow on Twitter, said he: “would rather have the cash!” I wonder if more shareholder value would have been delivered had Dragon cast an eye at some of the financially constrained smallcaps (particularly some of the ones you can find on AIM) that are trading at bargain basement prices. Another Irish listed oil stock, Tullow Oil, reported a chunky (31m of net pay) oil find offshore Côte d’Ivoire.


(Disclaimer: I am a shareholder in Ryanair plc) We had a lot of news from the airline sector. Aer Lingus released its latest traffic statistics this morning. These were unambiguously good numbers, with load factors +2.9ppt and flown passengers +2.4ppt. I was particularly impressed by the 12.7% rise in long-haul (transatlantic) passengers, a factor of the 10.5% increase in RPKs. Another Irish airline reporting a rise in passenger numbers was Ryanair, which revealed a 5% yoy increase to 7.51m in May, bringing Ryanair’s total number of passengers carried over the past 12 months to 76.6m.


In other airline sector news, it was reported today that Kerry Airport’s revenues fell 40% last year. Credit is due to local management, who, demonstrating the county’s well-earned (I may be showing my Cork bias here!) reputation for parsimony cut administration costs by an admirable 35% in response.  Some months ago I wrote of the need for airports in the south and west of Ireland to consolidate, and even after the government’s decision to cease funding for Galway and Sligo Airports I wonder if they’ll be the last to see their government support pulled. Indeed, in this regard I was interested to also read today that Spain is to at least partially close 30 of its 47 State run airports.


In the construction space, Grafton put Irish DIY chain Atlantic Homecare into examinership. This is a smart move by management as it should allow it to close underperforming stores and save on the rent bill.


(Disclaimer: I am a shareholder in France Telecom plc and Independent News & Media plc) In the TMT sector, France Telecom’s unions were unsuccessful in their moves to force a dividend cut. However, I fear that this may prove to be round one in this battle, given the potential for increased political interference in the company, a concern I’ve previously noted.  In other TMT sector news, it was confirmed that Dermot Desmond has increased his stake in Independent News & Media ahead of tomorrow’s AGM. With yet another INM non-exec confirming their resignation, it will be interesting to see what new faces are co-opted to fill the gaps on the board after a wave of recent departures.

Written by Philip O'Sullivan

June 7, 2012 at 7:38 pm

Market Musings 5/2/2012

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It’s the calm before the storm as we’ve a seriously busy week ahead in terms of scheduled corporate news in both the UK and Ireland. Let’s recap on what’s been happening while I have a spare moment!


(Disclaimer: I am a shareholder in Ryanair plc) As had been widely expected, Hungary’s Malev ceased operations early on Friday. Ryanair illustrated perfectly the flexibility in its business model by bringing forward the opening of a new base at Budapest to exploit the new gap in the market. In other news, Ryanair also issued an open letter to Aer Lingus warning that it would resist any attempts by AERL to top up the IASS pension fund over and above previously disclosed levels. In a final piece of Ryanair related newsflow, the airline announced that the number of passengers it carried in January was -6% yoy, which is broadly in line with expectations. The fact that load factors were flat yoy at 71% to me illustrates that good sense underpinning Ryanair’s decision to ground 80 aircraft (nearly 30% of its fleet) over the winter.


In the energy sector, there was good news for Tullow, which finally inked a PSA with the Ugandan government. Dragon Oil was also the subject of scrutiny by some of the Dublin brokers, with Davy raising its NAV estimate by 7% to 678p, while Goodbody recently upped its total risked NAV derived price target on the Turkmenistan based oil producer to £8.15. Its share price closed at £5.16 on Friday, and for the sake of full disclosure it’s a stock that an investment fund I advise is contemplating adding to its portfolio.


(Disclaimer: I am a shareholder in Independent News & Media plc) I was interested to read that Dermot Desmond has increased his stake in INM to 5.75%. I have a small position in INM and wonder if this is shaping up to be a special situation deserving of more in-depth analysis to see if it’s worth buying more shares in the company. Finding the time to do such an analysis is of course easier said than done!


Elsewhere in the TMT space, I was disappointed to read that the amount of VC funding raised by Irish technology companies fell by 11.5% last year.


In the blogosphere, Wexboy did up an interesting piece on Tanzanite miner Richland Resources. Richard Beddard wrote a thought-provoking article on N Brown (regular readers will know that my preference for some time has been to avoid UK consumer facing stocks, with only Marston’s proving to be the exception to the rule for over a year now). John Kingham wrote a detailed piece on Smith & Nephew that served to remind me of how little attention I give to the pharma sector! Contrarian UK made a very welcome return to blogging by doing a detailed write-up on message board favourite Xcite Energy.


Finally, looking ahead, the main scheduled Irish corporate news this week are FY results from Elan & Smurfit Kappa Group (both on Wednesday) along with AGMs for United Drug (Tuesday) and Greencore (Thursday), which will no doubt provide plenty of food for thought.

Written by Philip O'Sullivan

February 5, 2012 at 7:21 pm

Market Musings 9/1/2012

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Newsflow is still light enough, which is good news from the perspective of getting some articles written for Business & Finance and also in terms of getting ready for my return to Smurfit for the start of the new term.


(Disclaimer: I am a shareholder in Independent News & Media plc) I was interested to read that legendary Irish investor Dermot Desmond has been increasing his shareholding in INM. This confirms press reports before Christmas.


(Disclaimer: I am a shareholder in Ryanair plc and Irish Continental Group plc) In the transport sector, Aer Lingus announced that it carried 9.775m passengers last year, a 0.5% increase on year-earlier levels. This performance, against the backdrop of a very weak Irish economy, is a credit to the yield and traffic optimisation measures implemented by CEO Christoph Mueller. Its Irish peer Ryanair made some encouraging comments at Davy’s New York conference, as did marine transport group ICG.


Given my previous remarks about Ireland’s glut of airports, you can imagine how I felt on reading that only 110 people a day use State-subsidised Donegal Airport. Yet another example of taxpayers’ money being well spent by politicians!


Switching to retail, this morning brought yet another grim update from HMV, which said that HMV Retail’s like-for-like sales were -9.8% in the 9 weeks to 31 December.


In the pharma space, Irish microcap AGI Therapeutics announced that it has received a recommended cash offer from Aravis today. Elsewhere, CRO Icon inked a partnership deal with Shire.

Written by Philip O'Sullivan

January 9, 2012 at 11:07 am

Market Musings 6/12/11

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The past couple of days have seen more hot air from Merkozy and a warning from S&P about the ratings it applies to all single currency users. This has been covered extensively elsewhere, so I’m focusing this blog on the budget and corporate newsflow.


We’ve seen a two-day budget presentation by the Irish government. Many of the responses that I’ve seen across various social media have been either hypocritical (Fianna Fáil activists hilariously complaining about the continuation of the policies implemented by their party when it was in government) or innumerate (people who should know better claiming that Ireland should carry on borrowing over €5,000 a year for every citizen – a policy whose logical conclusion is that more and more tax revenue will be diverted to paying interest costs, thus necessitating deeper cuts down the line). Thankfully the coalition government (which I did not vote for, incidentally) accepts that fiscal consolidation simply has to happen, although I would prefer if the balance of consolidation fell more on the spending side – I was particularly disappointed to see higher tax rates for CGT, DIRT & CAT, which makes no sense when Irish households urgently need to rebuild shattered balance sheets (Cormac Lucey has done some great work on this here).


(Disclaimer: I am a shareholder in Irish Continental Group plc) Switching to corporate newsflow, we’ve seen two big announcements from Greencore this week. Firstly, it announced that takeover  talks have ended, citing market turmoil and “the Board’s unanimous view on the strong underlying value of Greencore”. Secondly, this morning Greencore reported solid results, with 3.4% like-for-like revenue growth in its key convenience food segment achieved. Management say that the group has made a good start to FY12 despite tough market conditions. The conference call which followed the results revealed some good recent contract wins, such as for the supply of sandwiches to both Waitrose and Aldi. Overall, Greencore is cheap and has an attractive yield (circa 7%), but it also comes with £201.3m of net debt attached (roughly 3x FY EBITDA). Coming from the perspective of someone who likes high yielding stocks as a rule I would much prefer something like ICG, which also yields circa 7% but which has net debt of only €13m (less than a third of FY EBITDA).


(Disclaimer: I am a shareholder in Independent News & Media plc) Elsewhere, INM’s Australian associate APN cut its earnings guidance yesterday, which presumably means the risks to INM’s recently downgraded guidance lie to the downside. I was intrigued to read in the weekend press a report that financier Dermot Desmond has increased his stake in INM, which makes the most interesting shareholder register of any plc on the Irish Stock Exchange even more interesting!


(Disclaimer: I am a shareholder in PetroNeft plc) PetroNeft released “encouraging” early results from its fraccing programme in Western Siberia earlier today. While I would have preferred something a little more conclusive, it does allay some of my concerns about this stock.


(Disclaimer: I am a shareholder in Datong plc) Spy gadget maker Datong also issued results earlier today. To be honest I hadn’t been maintaining my model on it that diligently, so while it came in miles below my estimates I think this has more to do with my inertia towards what is a very small holding (just under 0.5% of the portfolio) more than anything else, although I note the shares were marked down (on low volumes) 19% today. I’ll update my model in the coming days to see if there are any interesting angles around the stock.


And finally – this article ties in with my own instincts at this time: “Funds bet on euro survival, 2012 risk rally“.

Written by Philip O'Sullivan

December 6, 2011 at 5:22 pm

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